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A rational subsidy regime

A rational subsidy regime
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First Published: Sun, Feb 21 2010. 08 59 PM IST

Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint
Updated: Sun, Feb 21 2010. 08 59 PM IST
Fertilizer subsidy in India is a touchy subject. So it is not surprising that the latest attempt at rationalizing it through a nutrient-based subsidy (NBS) has met with resistance. If the Union government’s effort is laudable, there are also ample signals that managing the transition to an NBS system will require some care.
NBS was announced on Thursday. It will be implemented from 1 April. In a nutshell, the scheme aims at subsidizing the nutrients used by farmers while fertilizer companies will be allowed to vary retail prices. It is in contrast to the retention price scheme (RPS), its variants and other changes in subsidies. These fixed the retail prices and paid the fertilizer companies the difference between the price at which the stuff was sold to the farmers and the retention price.
Illustration: Jayachandran/Mint
This system did not work. In 2008-09, to give the example of one difficult year, fertilizer subsidies jumped to Rs75,849 crore, roughly 1.52% of the gross domestic product (GDP). This represented a 17-fold increase from 1990-91. Clearly, this is unsustainable.
If the pricing is one issue, the consequences of these price distortions on nutrient imbalances are there for everyone to see. Because fertilizers such as urea are cheaper by at least a factor of two compared with more complex ones, their use is greater. The normal ratio for nitrogen (N) to phosphorous (P) to potassium (K) in soil is 4:2:1. In reality this is greatly skewed. Part of the blame can certainly be laid at the door of distorted prices.
An NBS system, in theory, promises to undo this. The trick, however, will lie in its implementation. If prices of complex fertilizers (such as diammonium phosphate and muriate of potash) are decontrolled too fast, it will only encourage more use of urea. While the Union government has said it will try to ensure that these prices do not go way out of line during the kharif 2010 season, it is still to chart a road map on how it will implement NBS after that. It has also announced a 10% increase in the price of urea. We think if the prices of complex fertilizers are decontrolled, this price needs to go up if nutrient imbalances are to be undone.
In the end, the key issue is how the subsidy will be delivered to farmers. Direct cash transfers may look alluring, but the problems in handing them out are complex.
In the meantime, decontrolling prices may not lead to efficiency on the part of fertilizer companies. It is a situation not very different from the administered price mechanism in fuels: whenever more money would be needed, prices would be increased. They never led to efficiency.
Will NBS result in efficiency in the fertilizer sector? Tell us at views@livemint.com
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First Published: Sun, Feb 21 2010. 08 59 PM IST
More Topics: Ourviews | Subsidy. Fertilizer | Urea | Farmer | Views |